Get Used to the “Powell Put”

In the land of the Federal Reserve and its market-manipulating mechanisms, there’s now an unofficial market term called the “Powell Put” or the “Powell Pivot.”

It is in direct reference to Fed chairman Jerome Powell. Before he became chairman, Wall Street referred to prior heads’ policies with terms like the “Greenspan Put” the “Bernanke Put” and the “Yellen Put.”

In layman’s terms, what the term means is that if the markets fall by too much, the Fed will swoop in and try to save the day, the month, or the year. A “put” in options terminology is insurance against a drop in prices. Nowadays, the “Powell Put” is the market’s insurance that the Fed will act to stimulate the markets if necessary.

Markets had been waiting for it to materialize. But Powell had previously talked about the need to raise rates to give the Fed “enough ammunition to fight the next crisis.” The size of the Fed’s balance sheet would also have to be reduced enough to provide it enough room to grow if needed.

Markets began to worry the Powell Put might never materialize when he raised interest rates in December, when the market was in the middle of a severe correction (that nearly culminated in a bear market). He also said the balance sheet reductions, or quantitative tightening, would run on “autopilot.”

Markets tanked on his comments. But then on Jan. 4, after stocks fell nearly 20%, the “Powell Put” finally materialized.

In comments addressing the American Economic Association, Powell said he was “prepared to adjust policy quickly and flexibly.”

And about the balance sheet reduction policy that was on autopilot in November, he said

“We wouldn’t hesitate to change it.

Powell has subsequently emphasized the need for “patience.” The Dow has continued to rally behind his newfound dovishness. In fact, this January was the best January in 30 years. If the rally continues, the market could soon be testing its early October highs.

What this means is that the Fed isn’t going to raise rates anytime soon. As my colleague Jim Rickards has explained, “patience” isn’t just a word. It’s a signal to markets that the Fed will not be raising rates anytime soon, and that it will give them notice when it is.

The Fed is also unlikely to reduce the size of its balance sheet in a bold way, as long as economic headwinds from around the world continue. That in turn, means dark money will remain available to boost markets.

There are two main ways the Federal Reserve can unleash dark money into the financial system. One is by keeping interest rates (or the cost of money) low or at zero percent. The other is through quantitative easing (QE) or bond-purchasing, where the Fed creates money electronically and uses it to give to banks to buy Treasury or mortgage bonds from them.

Reducing the cost of money, or interest rates to zero, was done for the first time by the Fed in the wake of the financial crisis. The Fed did this supposedly as an emergency measure to inject money into the system because banks had stopped lending. In addition, QE was enacted because interest rate policy wasn’t effective enough. Again, supposedly, it was supposed to be an emergency measure.

But we saw how the stock market reacted when Powell said QT would run on autopilot. Now the Fed is ready to finalize plans that would leave the balance sheet at a much higher level than it previously envisioned. Again, that means additional support for markets.

In the latest development, as Brian Maher discussed in yesterday’sDaily Reckoning, Federal Reserve Bank of San Francisco President Mary Daly suggests that the Fed could decide to use its balance sheet as a routine part of how it guides the economy, not just as a last-ditch measure to deploy in emergencies.

That means what was once supposed to be an emergency measure could become just another regular policy tool if normal interest rate policy isn’t enough to stimulate a non-responsive economy. We’ll have to wait and see if this idea gains traction within the Fed. Either way, reducing the balance sheet to “normal” levels is no longer a priority for the Fed.

But it’s not just the Fed that is putting additional tightening on hold. Central banks around the globe have been re-calibrating their policies to reflect the weaker economic environment.

As one Wall Street Journal article recently reported, “Central bankers have geared their messages toward pausing on tightening steps rather than imminently launching new stimulus.”

Central banks from South Korea, Malaysia, Indonesia and Canada, who all raised rates last year, are now questioning such plans. The Bank of Japan and European Central Bank also indicated last week that their negative rates are here to stay for the foreseeable future.

The truth is it’s all about the $21 trillion of dark money fabricated by, and dispersed from, the world’s major central banks. The volatility periods, including last year’s nearly 20% correction, are related to the fear that dark money supplies will go away.

These factors will keep sparking intermittent fear and volatility this year — but dark money collusion will not be going anywhere. While there will be some minor rate hikes here and there, and mild tweaking of massive asset books, the overall story will remain the same. You should expect major central banks to end the year, on average, with asset books in total size right where they started.

Once again, that means dark money will continue to be available to markets.

The fact is, dark money is the #1 secret life force of today’s rigged financial markets. It drives whole markets up and down. It’s the reason for today’s financial bubbles.

On Wall Street, knowledge of and access to dark money means trillions of dollars per year flowing in and around global stock, bond and derivatives markets.

I learned this firsthand from my career on Wall Street. My first full year working on Wall Street was in 1987. I wasn’t talking about “dark money” or central bank collusion back then. I was just starting out.

Eventually, I would uncover how the dark money system works, how it has corrupted our financial system and encouraged greed to the point of crisis like in 2008. When I moved abroad to create and run the analytics department at Bear Stearns London as senior managing director, I got my first look at how dark money flows and its effects cross borders.

That dark money goes to the biggest private banks and financial institutions first. From there, it spreads out in seemingly infinite directions affecting different financial assets in different ways.

Yet these dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups. To be a part of the dark money elite means to have control over many.

These is not built upon conspiracy theories. To the contrary, alliances make perfect sense and operate publicly. Even better, their exclusive dealings and the consequences that follow are foreseeable — but only if you understand how the system works and follow the dark money flows.

Dark money rules the world, and it could keep the bull market running longer than most people expect, even though the eventual turnaround could be ugly.

About Nomi Prins:

Nomi Prins is an American author, journalist, and public speaker. She has worked as a managing director at Goldman-Sachs and as a Senior Managing Director at Bear Stearns, as well as a senior strategist at Lehman Brothers and analyst at the Chase Manhattan Bank. Prins is known for her book All the Presidents’ Bankers in which she explores over a century of close relationships between the 19 Presidents from Teddy Roosevelt through Barack Obama and the key bankers of their day based on original archival documents. Prins also received recognition for her whistleblower book, It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street, for her views on theU.S. economy, for her published spending figures on federal programs and initiatives related to the 2008 bailout, and for her advocacy for the reinstatement of the Glass–Steagall Act and regulatory reform of the financial industry.